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Five Things You Need to Know: Sins of the Father

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In a bull market, among many bulls, Arthur "Bull" Cutten ranked king of the herd, until he didn't.

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Kevin Depew's Five Things You Need to Know to stay ahead of the pack on Wall Street:

God said don't give me your tin horn prayers
Don't buy roses off the street down there

- Tom Waits, Sins of My Father

Some things are near impossible to conceive without the grace of reality. By that, I mean, there are some things you just can't make up. Nearly 80 years ago, December 10, 1928 to be exact, Time magazine ran a photograph on its cover of a well-dressed man wearing a flat cap confidently taming an imposing bull with a device called a twitch. A twitch is a long stick with a loop of chain or a clamp at the end that wraps around the upper lip of a horse or, in this case, a bull, and is twisted to tighten securely to the lip. According to veterinarians, the twitch doesn't work by just causing pain, though it certainly does, but by "incentivizing" - a Wall Street word - the release of endorphins in the bull's brain. Endorphins are neurotransmitters produced in the brain that supposedly both reduce pain and, quite appropriately for Wall Street, induce euphoria. The well-dressed man inducing euphoria in the brain of the bull in that photograph is the famed commodities trader Arthur W. Cutten, and if ever a photograph so fully and magnificently captured a particular moment in our national subconscious I wouldn't know what it would show, or where, exactly, to look for it.

So there's commodities speculator Arthur W. Cutten on the cover of Time magazine, only months away from the final crest of the bull market, overpowering a bull with a device that incentivizes euphoria by causing pain, an unwitting homage to the creative destruction of capitalism, and to the heroes and villains erected by it to alternately tear down and rebuild.

Birds cry warnin' from a hidden branch
Carvin' out a future with a gun and an axe
I'm way beyond the gavel and the laws of man
Still livin' in the palm on the grace of your hand

- Tom Waits, Sins of My Father

But let's back up a bit. Why is this man on the cover of Time? Well, because, as Time puts it in the cover story, "In a bull market, among many bulls, Bull Cutten ranks king of the herd." Fittingly, though conspicuously unsaid, the king of the herd remains that way by forcing the release of euphoria-producing endorphins; yes, it hurts so good... at least until we develop a tolerance to it, then it simply hurts.

Night is fallin' like a bloody axe
Lies and rumours and the wind at my back
Hand on the wheel, gravel on the road
Will the pawn shop sell me back
What I sold

- Tom Waits, Sins of My Father

Arthur Cutten would know pain soon enough, also humiliation, and as much as the public idolized his behavior as a speculator and his image as "Bull Cutten" during the bull market, they would turn on him and vilify those same traits as social mood shifted. Less than a year after that photograph appeared on Time, the stock market crashed and Cutten lost millions. Within four years of the photograph, Cutten and a host of other speculators would be hauled before the U.S. Senate's Pecora Commission to testify about their trading practices. And a little more than two years after the Pecora Commission hearings, Cutten would appear before the Grain Futures Commission charged with lying to the U.S. government about how much wheat he owned "in order to manipulate the price of grain and thereby to make large profits," according to Time.

Smack dab in the middle of a dirty lie
Star - spangled glitter of his one good eye
Everybody knows that the game was rigged
Justice wears suspenders and a powdered wig

- Tom Waits, Sins of My Father

Incredibly, if only because the situation lacks any decent sense of irony, let alone acknowledgment of nearly a century of public records and history, the House Energy and Commerce subcommittee on Oversight and Investigations is even today holding hearings on the role of speculators in energy futures markets. They are presumably quite serious about the "Investigations" part, less so about the "Oversight" part, unless by "oversight" they mean, literally, a failure to see what is obvious.

Some legislators are seeking an outright ban on speculation in energy markets. Some are seeking to impose limits on the size of the bets speculators may make. Few are apparently aware of the unintended consequences of these actions; namely, a government guarantee of higher oil prices than free market forces would discover.

God all mighty for righteousness sake
Humiliation of our fallen state
Writ' me the book of tubold Cain
Long black overcoat will show no stain

- Tom Waits, Sins of My Father

Has the role of speculators in energy markets increased? Without question, the same way speculative activity increases in any market that moves significantly higher. Eight years ago, for example, the stocks of companies such as ExxonMobil (XOM), Chevron (CVX) and Haliburton (HAL) averaged less than half the trading volume they do now. Speculators gravitate toward hot markets, whether they be futures markets, equities markets or fixed income markets, and in doing so they provide very unique and specific functions; among them reduced volatility and increased liquidity, which in futures markets helps producers and consumers plan investment and consumption decisions.

The critical oversight by the subcommittee on Oversight and Investigations is that speculators do not add demand to the market by simply purchasing oil futures contracts. Someone, somewhere, must be demanding oil that exceeds production; otherwise, we would be able to see a growing stockpile of excess supply. To say that anything physical is being "stockpiled" through the futures market is to confuse a promise for a fact.

Nevertheless, logic and reality aside, we know how this will end. It is no longer even up for debate. The puppet show will continue on Capitol Hill, but that just means the play has already been written and the characters drawn. Arthur W. Cutten knows how it will end. When positive, social mood embraces the heroes of the bull market; when negative, it vilifies, even jails them.

The horse is steady but the horse is blind
Wicked are the branches on the tree of mankind
Roots grow upward and the branches grow down
It's much too late to throw the dice again
I've found

- Tom Waits, Sins of My Father

Political responses to darkening social mood typically take the form of widespread interventionist policies. That is but one manifestation. The wave of darkening social mood expressed by the stock market crash of 1929 did not actually crest until the New Deal was well under way. Similarly, this latest wave of negative social mood is still building. We can expect many more Arthur Cuttens to appear before Congress, many more acronyms to be created by the Federal Reserve to intervene in the price discovery of worthless financial assets, and many more Congressional hearings on the destructive nature of speculation.

Some 70-odd years ago, the Grain Futures Commission declared that Cutten was guilty on six of the price manipulation counts he was charged with and ordered him suspended from all U.S. grain exchanges for two years. After the verdict Cutten declared, "What's the use of trading? The market doesn't move." In time, we'll see exactly what Cutten meant by that.

I'm gonna take the sins of my father
Take the sins of my mother
Gonna take the sins of my brother
Down to the pond

- Tom Waits, Sins of My Father

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No positions in stocks mentioned.

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